1/28/2005 @ 12:50PM

Should P&G Sell Its Drug Business?

Now that
Procter & Gamble
is buying
Gillette
in a $57 billion merger that Gillette shareholder
Warren
Buffet
Warren Buffet
calls “a dream deal,” maybe it’s time for P&G to think hard about whether it wants to keep its tiny but fast-growing pharmaceuticals arm.

Just a few years ago, pharmaceuticals were one of the smallest parts of P&G
, accounting for only one-fortieth of total sales in a company better known for Head & Shoulders, Crest and Tide. That has changed, largely due to a product called Actonel, a pill used to prevent osteoporosis. Actonel hasn’t managed to catch up with Fosamax, the $3 billion osteoporosis drug made by
Merck
, but it is still a $1 billion seller–one of 16 billion-dollar brands at Procter & Gamble. The addition of Gillette’s businesses will bring the total to 21 billion-dollar brands.

For companies like P&G, and also for materials giant
3M
, prescription drugs can be an enticing prospect. They are incredibly high-margin products. Because prescription pills are paid for mostly by insurers, not consumers, these drugs are far more expensive than consumer products. When the ulcer pill Prilosec was sold by prescription by
AstraZeneca
, it brought in $6 billion a year, making it the biggest-selling medicine in the world. Now Astra and P&G sell it over-the-counter, at a significantly reduced price.

But selling pharmaceuticals has risks that consumer products doesn’t. Heavy advertising–and quality merchandise–can keep sales of a Head & Shoulders or a Tide at billion-dollar levels for decades. Drugs, by contrast, are heavily reliant on patent protection to keep cheap, copycat generics at bay–and the patent clock starts ticking as soon as a medicine is invented. When the generics come, sales vanish–and even a brand like Claritin or Prilosec loses much of its value.

Intrinsa could still get through the FDA, and P&G is developing a treatment for heart arrhythmias that may be promising. But given that drugs must be marketed to doctors as much as to consumers, it’s hard to wonder if P&G might be better off selling its medicines to a big pharmaceutical company that’s hungry for new prospects–and finding other ways to use the cash.

The idea has certainly come up before. When
Bristol-Myers Squibb
was in talks to sell Clairol to P&G, it reportedly proposed swapping the hair products line for P&G’s drugs. In the end, P&G preferred to buy Clairol outright. But if P&G were willing to part with its medicines now–especially with one blockbuster already there–a down-and-out pharma like Bristol might have no choice but to pay a pretty premium.

Drug companies, hungry to improve their margins, have sold off lots of consumer products. Bristol recently put its consumer drugs business up for sale, and
Pfizer
got rid of its Schick-Wilkinson Sword razor business. The expertise needed to develop blockbuster medicines is simply very different from that needed to sell shampoo or painkillers to the masses.

In fact, there’s only one reason for P&G to keep its drug arm: If making medicines has become so incredibly risky, then perhaps it’s best kept as a sideline to a steady business–and not made an enterprise unto itself.